One advisor had a day to produce voluminous records. That's the kind of request likely to grow more common as the SEC performs more unscheduled audits

June 30, 2010 — 6:40 AM UTC by Les Abromovitz, Columnist

2 Comments

In the area of compliance, it is sometimes difficult to light a fire under advisory personnel. They postpone fulfilling compliance obligations until the SEC advises them that an examination is forthcoming. Here’s why you should turn the heat up: you might need to produce voluminous records by tomorrow.

In case you or anyone else in your firm is skeptical, here is one example that may change your blasé attitude. A client of National Compliance Services Inc. received a letter via e-mail from the SEC on June 1, 2010. A lengthy Examination Information Request List was attached to the e-mail. The request list specified all of the information and records that the SEC needed to conduct the examination. Although I am not sure of the exact time of day when the RIA received the request list on June 1, I can say with certainty that the materials were due by the close of business on June 2, 2010.

In this particular case, the on-site phase of the examination was scheduled to begin on June 7, 2010. Unfortunately, the RIA’s chief compliance officer was going to be out of the office on that day and hoped that the exam could be pushed back. Instead, the SEC moved up the exam to June 4, 2010.

Here’s a tip: Get ready to be examined without complaining

In the past, the SEC had been committed to examining advisory firms on a regular schedule. If your previous exam went well and there were no serious deficiencies, you could reasonably expect that SEC examiners would not be back for a few years. Now more exams are scheduled in response to tips and complaints.

In a speech on June 8, 2010, SEC Chairman, Mary L. Schapiro, said that the Commission does not possess the resources to examine 10% of registered investment advisers (“RIAs”) each year. According to Ms. Schapiro, the SEC is sharpening its risk-based targeting strategies and revamping the Commission’s system of gathering and analyzing tips and complaints. Ms. Schapiro reported that hundreds of thousands of tips and complaints are received each year, so sorting through them is no easy task.

Because of the SEC’s new approach, RIAs should be ready for an exam at almost any time. In a previous posting, I stressed that RIAs should test their ability to quickly locate and produce records required by SEC examiners.

You should also make sure that your compliance program is up-to-date at all times in case the SEC decides to conduct an exam with little or no warning.

Establishing a dialogue with the SEC

Aside from the records required as a prelude to the on-site exam, additional information will be requested during the examination. There will also be time constraints imposed on providing those records.

Any concerns you have about the exam, as well as the records requested, should be directed to the person signing the Initial Information Request. If a particular records request is unclear or unduly burdensome, you should not hesitate to contact that person. During the exam, you should discuss any questions, concerns, or complaints you may have with the examiners digging through your books and records. Depending upon the outcome, you can attempt to resolve those issues through the examiner’s supervisor.

As a last resort, you are permitted to contact the Office of Compliance Inspections and Examinations’ hotline for SEC-Registered Entities. The hotline is administered in coordination with the SEC’s Office of Inspector General. Although the hotline is not intended to supplant routine dialogue with examination staff and supervisors, it can be used to raise questions, complaints or concerns about the conduct of your exam. You can learn more about the hotline by clicking on the following link:
http://www.sec.gov/about/offices/ocie/ocie_hotline.shtml.

Put down the phone and prepare for an exam

Unfortunately, a phone call to an SEC hotline won’t solve your compliance problems. To put out the fires in your compliance program, you need to prepare now.

Before another day goes by, make certain you have prepared a current inventory of any compliance risks faced by your firm. Your policies and procedures should address those compliance risks in order to prevent them from occurring. Your compliance manual should evolve as those risks change. That evolution should begin today, not the day you receive a phone call.

Policies and procedures should be reviewed and tested on a regular basis to ensure they are effective. You need to turn up the heat on your compliance program to avoid getting into hot water with the SEC.

Les Abromovitz is a senior consultant with National Compliance Services, Inc. Les, an attorney, is the author of Growing Within the Lines: The Investment Advertising and Marketing Compliance Guide (Available on Amazon.com or through NationalUnderwriterStore.com). He can be reached at 561-330-7645, Ext. 213, or at LAbromovitz@ncsonline.com.


Mentioned in this article:

NCS Regulatory Compliance
Consulting Firm
Top Executive: Mark Alcaide, COO/Partner



Share your thoughts and opinions with the author or other readers.

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Bill Winterberg said:

July 2, 2010 — 12:21 AM UTC

Advisors without document management and electronic record-keeping systems take note: your practice will come to a halt while you and your staff scramble to produce requested documentation in an audit.

This reason alone should be motivation to purchase a system capable of indexing and filtering captured information (documents, scans, emails, etc.) so requested records, and ONLY those requested, by an auditor can be delivered on encrypted media.

Bill @ <a href="http://fppad.com" rel="nofollow">FPPad.com</a>

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Zaheer Master said:

July 6, 2010 — 8:54 PM UTC

I completely agree with Bill, he hit the nail right on the head. The burden of managing compliance for advisors is only going to grow with more SEC regulation and more frequent examinations.

If you want to know how our clients handle these surprise examinations without breaking a sweat, see our blog post: http://blog.aisww.com/bid/42927/Document-Management-How-to-Survive-a-Surprise-SEC-Audit


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